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The Billionaire’s Tax Loophole

Lots of attention has been paid to the freeloading “47-percenters” – the 47% of Americans who pay no federal income taxes.

But what about the tax-ducking 0.004 percenters?

Associated Press

Red McCombs

An article by Bloomberg’s Jesse Drucker details a lucrative tax loophole used by the wealthy to defer or avoid taxes. It’s known as unrealized appreciation or “a variable pre-paid forward contract,” the strategy has allowed billionaires like Billy Joe “Red” McCombs and others to earn hundreds of millions of dollars without having the money classified as taxable income.

McCombs, co-founder of Clear Channel Communications Inc., for instance, reported a $9.8 million loss on his tax return, but failed to include about $259 million from a lucrative stock transaction, according to the article. The IRS ordered him to pay $44.7 million in back taxes and he’s since settled for about half the amount. (He declined comment to Bloomberg and couldn’t immediately be reached for additional comment).

The loophole works like this: A stockholder lends shares to an investment bank with a promise to turn over the shares years later. In return, the shareholder receives money — $228 million in the case of Dole Food Co.’s David Murdock, according to the article. The taxes are deferred until the time of delivery. The taxpayers argue that the share loans don’t amount to transfers or sales and therefore shouldn’t be subject to capital gains.

What’s the solution?

Attorney David S. Miller proposes a “mark-to-market system” to tax the annual appreciation in the stock holdings of the top 1/10th of 1% of taxpayers. That would essentially tax gains in a given year regardless of whether the shares are sold. In a 2005 article in the journal Tax Notes, Miller estimated this approach would raise between $490 billion and $750 billion over a decade.

That may close one loophole. But there are loads of other tax loopholes used by the wealthy and their highly paid accountants. More than 10,000 Americans who earned more than $200,000 in 2007 paid no incomes taxes.

It’s all perfectly legal, in most cases. But it just shows that there are non-taxpayers on all rungs of the income ladder.

Do you think tax-avoidance is a bigger problem at the top or bottom of the